More VC Dollars than Angel, Leads to the Imbalance in the Early Stage Market

By

Alok Mittal

Mar 18, 2010 11:23 am IST

This is part 1, in a 2-part series on the Gaps in Early Stage Funding.

For the past few years, the Indian startup market has been on an uptrend – not just in terms of the number of startups and deal activity, but also in terms of the visible energy one is able to witness among entrepreneurs. One of the key constraints in the equation is the lack of availability of early stage investments. One might argue that since entrepreneurs complain of lack of early stage capital, and early stage investors complain about lack of high quality opportunities, there is some sort of an imbalance in the picture. Entrepreneurs in the most active venture hubs like Silicon Valley also find raising capital hard, and that is in part what makes the process work. On the imbalance, I do however agree that there is lack of capital in the system.

First, the early stage market needs to be disaggregated and looked at in parts. In mature markets, there is an equation between the amount of angel dollars and amount of VC dollars – given that angel deals are an order of magnitude smaller, there are a lot more angel deals being done than those that are able to subsequently raise venture capital. In India, there is probably an order of magnitude more venture capital than angel dollars. This creates an imbalance which explains both the entrepreneurs’ and VCs’ frustration. This has partly led to the formation of “VC like seed funds”, but they can only partly fill the volume gap in angel investing.